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APEC SPECIAL

VIETNAM TRADES UP

By joining the WTO, Asia’s second-fastest-growing economy is poised to kick its exports into a higher gear.

By Kay Johnson/Hanoi

Anthony Salzman remembers the last time Vietnam was tipped to be Asia’s next tiger economy. The former antiwar protester turned business consultant was representing Caterpillar in Vietnam when the country opened up to foreign investment in the early 1990s. Back then, Hanoi’s streets were filled mostly with bicycles and all fax machines had to be registered with the police, but that didn’t stop international executives from packing the bar of the only foreign-run hotel in Hanoi, the Metropole, to plot their future fortunes.”In that one bar on any given night;’ recalls Salzman, “there were people who, combined, could have pledged to invest $50 billion on the spot.” The good times didn’t last.In large part due to the communist government’s murky investment rules and snail-pace economic reforms, investors grew frustrated and disillusioned over Vietnam’s prospects. After the 1997 Asian financial crisis hit, the country’s growth rate plunged from 8.2% to 4.8% in two years. “Vietnam didn’t so much crash;’ Salzman recalls. “Itwas more like a dud.”

Nearly a decade later, Vietnam’s economy is sizzling, not fizzling-and investors are pouring back in, bettingthat the country is ready to adopt sweeping free-market reformsand open up to the world. There’s a sound reason to think thingsare different this time. Last week, after many years of trying,Vietnam won its bid to join the World Trade Organization, amove that could help liberalize the country’s economy and sparkan export-driven boom similar to the boost China received after it joined the WTO in 2001. Vietnam is already on a roll. It’s GDPgrowth rate this year is projected to be 8.2%, the second-fastestpacein Asia behind China and in a dead heat with India.Exportswere up an estimated 24% in the first 10 months of 2006. The nascent stock market in Ho Chi Minh City is one of Asia’sbest-performing this year, up 70%. To top it all off, Hanoi is hosting this year’s Asia-Pacific Economic Cooperation summit,onNov. 18-19, which is expected to be attended by U.S.PresidentGeorge W. Bush and China President Hu Jintao. Salzman, whotoughed out the lean years and built an industrial-materialsdistributorship with annual turnover of $100 million, says hethinks Vietnam has finally arrived as a modern economy. “Before, people said [the Vietnamese] weren’t ready,” he says.”Now, I think they’re ready.”

There’s little doubt the country has a lot going for it. The workforce is educated and young-54% of Vietnam’s 84 million citizens are under the age of 30. Wages are lower than they are in China’s coastal cities, which compete for manufacturing jobs. The Communist Party recently installed a new government led by Prime Minister Nguyen Tan Dung, who has vowed to continue economic reforms and to tackle the country’s pervasive corruption. While it’s true that Vietnam’s economy is still relatively small-at $53 billion last year, the country’s total GDP is about half that of the Philippines-it is also vibrant, with a growing entrepreneurial class (40,000 private businesses were launched in 2005) and thrivingcommodity businesses. Vietnam is now the world’s largest pepperexporter and second-largest exporter of coffee, cashews and rice. And multinational companies are increasingly selecting the country as a manufacturing base. Canon Inc. has two giant printer factories in Vietnam and is building a third in Bac Ninh province, 20 miles northeast of Hanoi. The new plant will be the largest inkjet printer factory in the world. Nike recently increased its annual production in Vietnam from 54 million pairs of shoes to 70 million, making the country the world’s second-largest source of Nike sneakers (China is the largest).

Government officials are counting on WTO entry to maintain that momentum. As the organization’s 150th member, Vietnam stands to get greater access to overseas markets such as the U.S. and Europe for its agricultural and manufactured exports; by hewing more closely to free-trade policies the WTO requires of its members, it may also be able to attract additional foreign investment in everything from factories to petrochemical plants, fueling job growth. (In the first10months of this year, foreign directinvestment in Vietnam was estimated at $6.5 billion, surpassing the $6.1 billion total for all of last year.) “The WTO is sort of the stamp of approval that many, many large companies have been waiting for.” says Tim Tucker, country managerfor Ford Vietnam, which has anassembly plant outside Hanoi.”They are just going to flood into this country.”

But that investment has a price attached. To gain WTO entry, Vietnam made greater concessions than other nations have been required to make upon joining, agreeing to lower trade barriers, reduce many subsidies and allow virtually unfettered foreign competition in some sectors of its domestic economy. “It’s a tougher deal than even China got.” says Jonathan Pincus, a Hanoi-basedeconomist for theUnited Nations Development Programme (UNDP). For example, next April, Vietnam must allow foreign banks to set up their ownbranch offices in the country, without requiring them to partner with domestic lenders as banks wanting to enter China have been obligated to do. Vietnamese law now protects its state-dominated insurers by banning foreign insurance companies from selling to individuals, but that will change under the WTO. The stakes are high: less than 5% of Vietnamese people now have bankaccounts or insurance, so the potential market is enormous. In the retail sector, dominant state-owned companies and small shop owners alike are certain to feel the pinch as foreign chains launch offensives. “It’s going to change very quickly.” Pincus says. “Big supermarkets, big restaurant chains, big auto-repair shops will come in and offer better service-and customers will flock to them.”

What could be bad for domestic businesses is welcomed by many Vietnamese consumers. Le To Nga, 65, lived through the Vietnam War and stood in line for ration cards in the 1980s. Today, she’s happily filling her shopping cart at Big C, a vast new supermarket on Hanoi’s outskirts run by France’s Casino Group in a joint venture with a local company. Shopping “is not a matter of patriotism at all.” Nga says. “These days, we just buy what we like.” Foreign giants entering Vietnam will likely create as many or more jobs than they’ll destroy, Pincus says, and the influx of new banks will free up credit-now available chiefly to state-owned companies-for capital starved private businesses. Some Vietnamese businesses even welcome the competition. ‘I’m not worried.”SaysLy Qui Trung, founder of Pho 24, a chain of noodle shops. “We’ve already got a head start and a strong brand. I think we can compete even against McDonald’s.” (Trung will have to wait for that matchup; McDonald’s says it has no plan to enter Vietnam.)

While local businesses gear up for the fight, Vietnam’s government will have to move fast to bring its legal system and infrastructure up to speed if the country hopes to attract more multinationals. Running a factory in Vietnam can be a frustrating proposition. Electricity production is barely meeting demand, which is growing at 15% per year. Roads and ports are increasingly congested.Nike Vietnam’s general manager Amanda Tucker says the company’s containers sometimes sit on the dock for 24 hours before shipping out. Because Vietnam has no deep-waterport to handle the new larger “supercontainer” ships, most exports must first go to Singapore before shipping to the U.S. and Europe, meaning more expense and delay. “The system is definitely under strain.” Tucker says, and with the expected post-WTO export surge, “it’s only going to get worse:’ Le Cong Minh, general director of Saigon Port, saysthere are plans to spend $600 million for upgrades, including a deep-water port at Cai Mep on the southern coast, by 2010 . But the project has yet to be approved.

Perhaps Vietnam’s biggest adjustment in joining the global economy will be changing its ingrained culture of corruption, secrecy and state intervention. The government recently enacted extensive new laws covering enterprise, investment and securities, which would boost protection for private businesses and increase transparency. Still, it will take time to train thousands of bureaucrats to apply rules fairly. The country ranks in the bottom third of Transparency International’s corruption index; a recent government inspection of state ministries uncovered 1,700 graft cases in the first nine months of this year. Some investors grumble the government is still apt to make sudden changes in taxes, for instance, without notice. “Information is a big issue;’ says Dominic Scriven, director of Dragon Capital, an investmentbanking firm in Ho Chi Minh City. “What you thought was true in January, may no longerbe true in December.”

Plenty of foreign firms have learned that the hard way. One of their main concerns is government meddling-a practicethat Carl Thayer, a political professor at the AustralianDefenceForce Academy, calls “kicking the foreigner in the shin and demanding compensation.” In a recent instance, Dutch bank ABN AMRO was accused by authorities of illegal foreign-exchange trades with state-owned Incombank, costing the latter $5.4 million. The Vietnamese bank is demanding that ABN AMRO repay the losses­ even though they were incurred by an lncombank employee. ABN AMRO says it has done nothing wrong. Incombank won’t comment, and Vietnamese authorities haven’t said exactly which banking regulations have been broken. But what has sent a chill through the foreign investment community is that local Hanoi police-not state banking regulators-are running theinvestigation. “The rule of law is manipulated in Vietnam to serve interests rather than as an objective force.” Thayer says. If foreign companies can’t be confident they’ll get fair treatment, “it will make people more hesitant to invest.”

Vietnamese leaders must be asking a similar question: now that the country is a WTO member, will it be treated with fairness by the international trading community? By joining the WTO,Vietnam hopes to become free from trade restrictions such as garment quotas that in the past have constrained its exports to theU.S. and Europe. Textile manufacturing employs 2 million Vietnamese and is the country’s largest export earner after crude oil. But Vietnam’s trade relations with the West have sometimes been prickly. The U.S. in recent years has imposed antidumping tariffs on Vietnamese shrimp and catfish; the E.U. recently placed similar restrictions on Vietnamese-made shoes. While WTO membership gives Vietnam the ability to challenge such barriers, the country may still find itself blocked by them because Vietnam joined the WTO as a “non-market economy,” a classification that denies it some protections afforded to fully fledged members. To complicate matters, the U.S., the country’s largest export market, has yet to legally recognize Vietnam’s WTO membership. Although passage of the necessary legislation that would grant “permanent normal trade status” to Vietnam is usually a mere formality, it could get held up in Congress by lawmakers seeking to protect textile manufacturers in their home states, or by politicianswanting to punish Vietnam for its poor human-rights record. As a result, the country could find itself in the unusual position of joining the WTO but having none of the benefits apply to its trade with the U.S., which imported nearly $6 billion in goods from Vietnam last year. “There’s no question that WTO is going to be a very good thing for Vietnam.” says the UNDP’s Pincus. “But the thing is, they don’t know how dirty the U.S. is going to play. Is the U.S. going to raise antidumping [barriers] every time Vietnam increases its market share?”

Despite the uncertainties, optimism over Vietnam’s economic prospects runs deep. Last week, Intel announced it would increase its investment in a planned computer-chip-assembly and testing plant to $1 billion, tripling the company’s original commitment. Upon completion, the 500,000 -square-foot facility in Ho Chi Minh City will be the largest of its kind in the world. “I think Vietnam is doing all the right things;’ says Rick Howarth, Intel’s country production manager. Says Scriven of Dragon Capital: “This is one of the most pro-change places I’ve been in. But there is time required. The headlines will come and the headlines will go, but the battle ahead is a long one.” With WTO membership promising to even up the odds, Vietnam is ready to rumble.